Unlocking the Value of Intellectual Assets

Lucasfilm collects billions from apparel, books, recordings, comarketing deals, and videocassettes based on its Star Wars movies. The top ten pharmaceutical companies got 34 percent of their 1997 revenues by selling products licensed from other companies. For sellers and buyers alike, intellectual assets are very big business. Managing intellectual assets [1] used to be a backwater, consigned to research laboratories and to dusty file drawers in the offices of patent attorneys. Insofar as such assets were managed at all, they were mostly managed defensively: after a company's labs developed something new, the legal department would get a patent and try to ensure that third parties didn't infringe on or otherwise misappropriate it. Too often, hugely promising inventions were unused by the companies that owned them and, at the same time, off-limits to third parties that understood their true value. Moreover, some companies developed and patented devices and technologies less to exploit them commercially than to prevent competitors from doing so or to avoid undermining current businesses. Although the filing of a patent gave notice to third parties that might have been interested in using it, there was no intellectual-asset market where companies could buy what they needed or sell what they couldn't commercialize themselves. Most companies with research labs have produced valuable intellectual assets that languished because their creators didn't recognize their value or lacked the ability or incentive to extract it. Perhaps the most notorious example is the Xerox Palo Alto Research Center (PARC), which in the 1960s and '70s developed many fundamental aspects of today's computing environments, such as the mouse, graphical user interfaces, and object-oriented programming. But Xerox failed to market these innovations seriously, because it didn't think of itself as a computer business. Stringent antitrust laws made companies like Xerox, IBM, and AT&T wary of licensing their innovations to others. Since then, of course, the value of intellectual assets and, more broadly, of intangible assets in general has greatly increased--at least partly because information technologies have diffused throughout the economy. Meanwhile, as the return on investment in physical assets has declined, the return on intangibles has soared. Along the way, many obstacles to commerce in intellectual assets have been overcome. For one thing, it is easier for companies to find and manage what they need thanks to the emergence of the Internet, intellectual-asset databases such as Lexis-Nexis, and intellectual-asset management software from Aurigin Systems and other firms. What is more, the availability of data on many deals involving intellectual assets helps sellers and buyers set the terms for licensing and acquiring them. As a result, marketplaces for intellectual assets have begun to emerge (see boxed insert, "Market makers in intellectual assets"). They promise to simplify the negotiating process and to promote low-cost deal s, including many too small to justify the large set-up costs buyers and sellers face today. As the market for intellectual assets becomes fluid and transparent, an everbroadening spectrum of industries--ranging from entertainment to pharmaceuticals to semiconductors--is being transformed: the intellectual-asset value chain, traditionally vertically integrated within corporate boundaries, is disaggregating, and successful focused creators and exploiters are starting to emerge. Although most companies will go on playing both roles, any business that tries to exploit as well as develop a particular intellectual asset runs the risk of not realizing its full value. Even companies that successfully generate and commercialize substantial numbers of intellectual assets must begin to think of themselves as sellers or buyers as well. The value of the seller's role is evident from the nearly $1 billion a year in royalties that IBM collects and from the stratospheric valuations of start-ups, with minimal or no revenues, that are being acquired almost daily by technology and Internet giants such as Microsoft, Amazon. …